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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                to
 Commission file number 000-33267
 
 Odyssey HealthCare, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    43-1723043(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification Number)717 N. Harwood, Suite 1500
    
    75201Dallas, Texas
    
    (Zip Code)(Address of principal executive offices)
 Registrants telephone number, including area code:
(214) 922-9711
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, par value $0.001 per share
    
    The NASDAQ Stock Market LLC
 Securities registered pursuant to Section 12(g) of the Act:
None
 o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



FORM 10-K
 ODYSSEY HEALTHCARE, INC.
For the Year Ended December 31, 2007
 TABLE OF CONTENTS
 PART IItem 1. Business
    
    
    5Item 1A. Risk Factors
    
    
    22Item 1B. Unresolved Staff Comments
    
    
    31Item 2. Properties
    
    
    31Item 3. Legal Proceedings
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    
    32PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    33Item 6. Selected Financial Data
    
    
    34Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation
    
    
    36Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    52Item 8. Financial Statements and Supplementary Data
    
    
    52Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    53Item 9A. Controls and Procedures
    
    
    53Item 9A(T). Controls and Procedures
    
    
    55Item 9B. Other Information
    
    
    55PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    55Item 11. Executive Compensation
    
    
    55Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    55Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    56Item 14. Principal Accountant Fees and Services
    
    
    56PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    56Signatures
    
    
    60First Amendment to Employee Stock Purchase PlanSubsidiariesConsent of Ernst & Young LLPCertification Required by Rule 13a-14(a), by Robert A. Lefton, Chief Executive OfficerCertification Required by Rule 13a-14(a), by R. Dirk Allison, Chief Financial OfficerCertification Required by Rule 13a-14(b)
  2




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FORWARD-LOOKING STATEMENTS
  
    
    general market conditions;
    
    adverse changes in reimbursement levels under Medicare and Medicaid programs;
    
    our ability to successfully integrate and maintain the operations of the hospice programs
acquired through our acquisition of VistaCare, Inc.;
    
    adverse changes in the Medicare payment cap limits and increases in our estimated
Medicare cap contractual adjustments;
    
    decline in patient census growth;
    
    increases in inflation including inflationary increases in patient care costs;
    
    challenges inherent in and potential changes in our growth and development strategy;
    
    our ability to effectively implement our 2008 operations and development initiatives;
    
    our dependence on patient referral sources and potential adverse changes in patient
referral practices of those referral sources;
    
    our ability to attract and retain healthcare professionals;
    
    increases in our bad debt expense due to various factors including an increase in the
volume of pre-payment reviews by Medicare fiscal intermediaries;
    
    adverse changes in the state and federal licensure and certification laws and
regulations;
    
    adverse results of regulatory surveys;
    
    delays in licensure and/or certification;
    
    government and private party legal proceedings and investigations;
    
    cost of complying with the terms and conditions of our corporate integrity agreement;
    
    adverse changes in the competitive environment in which we operate;
    
    changes in state or federal income, franchise or similar tax laws and regulations;
    
    adverse impact of natural disasters; and
    
    changes in our estimate of additional compensation costs under FASB Statement No. 123(R).
  3




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4




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PART I
 
 Item 1. Business
 Overview and Business Strategy
 Overview
     
    
    a physician;
    
    a patient care manager;
    
    one or more registered nurses;
    
    one or more certified home health aides;
    
    a medical social worker;
    
    a chaplain;
    
    a homemaker; and
    
    one or more specially trained volunteers.
  
    
    the provision of coordinated care and treatment;
    
    clear accountability for clinical outcomes and cost of services; and
    
    the potential reduction of stress and dysfunction of patients and their families.
  5




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Business Strategy
  Maintain VistaCare census and profitability and integrate VistaCare corporate functions:
 Grow organically and through acquisitions:
 Number ofMedicare-CertifiedHospice Programswithin this DailyPatient CensusRangeDaily Patient Census
    
    2006
    
    20070-50
    
    
    14
    
    
    
    1351-100
    
    
    22
    
    
    
    25101-200
    
    
    27
    
    
    
    27200+
    
    
    6
    
    
    
    7
  Organic Growth:
 Growth through selectively acquiring other hospices:
 6




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Manage our length-of-stay:
 Manage our costs more effectively:
 Improve the recruitment, retention and development of our senior program level management:
 Complete our portfolio review:
 Principal Office and State of Incorporation
  Hospice Services and Payment
  
    
    Nursing care
    
    Medical social services
    
    Physician services
    
    Patient counseling (dietary, spiritual and other)
    
    General inpatient care
    
    Medical supplies and equipment
    
    Drugs for pain control and symptom management
    
    Home health aide services
    
    Homemaker services
    
    Therapy (physical, occupational and speech)
    
    Respite inpatient care
 7




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
    
    Family bereavement counseling
     Our Current Reimbursement RangeLevel of Care
    
    Description of Care
    
    (Inclusive of Wage Index)*Routine Home Care
    
    Hospice services
provided in the
patients home or
other residence.
Accounted for 97.2%
and 96.9% of our
total days of care in
2007 and 2006,
respectively.
    
    $116.54-$198.92Continuous Home Care
    
    Continuous care
provided in the
patients home or
other residence
during a period of
crisis to manage
acute pain or other
medical symptoms for
a minimum of eight
hours per day, with
nursing care
accounting for at
least half of the
care provided. Paid
on an hourly basis.
Accounted for 0.9%
and 1.2% of our total
days of care in 2007
and 2006,
respectively.
    
    $680.19-$1,160.99

(per diem equivalent)General Inpatient Care
    
    Care provided in a
hospital or other
inpatient facility to
manage acute pain and
other medical
symptoms that cannot
be managed
effectively in a home
setting. Accounted
for 1.7% of our total
days of care for both
2007 and 2006.
    
    $524.08-$865.47Respite Inpatient Care
    
    Care provided for up
to five days in a
hospital or other
inpatient facility to
relieve the patients
family or other
caregivers. Accounted
for 0.2% of our total
days of care for both
2007 and 2006.
    
    $124.63-$191.76
 
 *
    
    Includes VistaCare programs  PercentageEffective Date of Rate Increase
    
    IncreaseOctober 1, 2003
    
    
    3.4
    %October 1, 2004
    
    
    3.3
    %October 1, 2005
    
    
    3.7
    %October 1, 2006
    
    
    3.4
    %October 1, 2007
    
    
    3.3
    %
 Hospice Utilization and Market Opportunity
  8




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Acceleration in Hospice Use:
 Length of Stay:
 Aging Population in the United States:
 Our Hospice Services and Centralized Support Center
  Caregivers:
  Community Education Representatives:
 Increasing Our Patient Census:
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Where We Provide Our Care:
  Medicare-Covered Care:
 Diagnoses:
 Percentage ofPatients Admittedby Primary DiagnosisPrimary Diagnosis
    
    2005
    
    2006
    
    2007Cancer
    
    
    32
    %
    
    
    32
    %
    
    
    31
    %End-stage heart disease
    
    
    20
    
    
    
    18
    
    
    
    18Dementia
    
    
    19
    
    
    
    19
    
    
    
    17Debility
    
    
    13
    
    
    
    15
    
    
    
    9Lung disease
    
    
    8
    
    
    
    8
    
    
    
    8End-stage kidney disease
    
    
    3
    
    
    
    3
    
    
    
    3End-stage liver disease
    
    
    2
    
    
    
    2
    
    
    
    2Other
    
    
    3
    
    
    
    3
    
    
    
    12Totals
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 10




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Hospice Programs, Inpatient Facilities and Support Center
 Hospice Programs and Inpatient Facilities:
 Alabama    Arizona     Arkansas   California            Colorado    Delaware   Florida    Georgia     Illinois   Indiana
 Louisiana      Massachusetts   Michigan   Mississippi    Missouri    Nebraska   Nevada   New Jersey   New Mexico   Ohio     Oklahoma   Oregon   Pennsylvania     Rhode Island   South Carolina   Tennessee
 Texas                   Virginia     Wisconsin
  
 (1)
    
    We had a total of fifteen inpatient facilities as of December 31, 2007 with a total of 172 beds. 11




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Alabama   Arizona    Colorado   Georgia        Indiana
 Massachusetts   Nevada   New Mexico    Ohio   Oklahoma    Pennsylvania   South Carolina
 Texas               Utah
  Support Center:
  Government Regulation and Payment Structure
  What are Medicare and Medicaid?
 Medicare Conditions of Participation.
 12




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
    
    Governing Body.Each hospice must have a governing body that assumes full responsibility
for the policies and the overall operation of the hospice and for ensuring that all services
are provided in a manner consistent with accepted standards of practice. The governing body
must designate one individual who is responsible for the day-to-day administrative
operations of the hospice.
    
    Direct Provision of Core Services. Medicare limits those services for which the hospice
may use individual independent contractors or contract agencies to provide care to patients.
Specifically, substantially all nursing, social work and counseling services must be
provided directly by hospice employees meeting specific educational and professional
standards. During periods of peak patient loads or under extraordinary circumstances, the
hospice may be permitted to use contract workers, but the hospice must agree in writing to
maintain professional, financial and administrative responsibility for the services provided
by those individuals or entities.
    
    Medical Director.Each hospice must have a medical director who is a physician and who
assumes responsibility for overseeing the medical component of the hospices patient care
program. These physicians may be employed by or under contract with the hospice.
    
    Professional Management of Non-Core Services. A hospice may arrange to have non-core
services such as therapy services, home health aide services, medical supplies or drugs
provided by a non-employee or outside entity. If the hospice elects to use an independent
contractor to provide non-core services, then the hospice must retain professional
management responsibility for the arranged services and ensure that the services are
furnished in a safe and effective manner by qualified personnel, and in accordance with the
patients plan of care.
    
    Plan of Care. The patients attending physician, the medical director or designated
hospice physician, and the interdisciplinary team must establish an individualized written
plan of care prior to providing care to any hospice patient. The plan must assess the
patients needs and identify services to be provided to meet those needs and must be
reviewed and updated at specified intervals.
    
    Continuation of Care. A hospice may not discontinue or reduce care provided to a
Medicare beneficiary if the individual becomes unable to pay for that care.
    
    Informed Consent. The hospice must obtain the informed consent of the hospice patient,
or the patients representative, that specifies the type of care services that may be
provided as hospice care.
    
    Training. A hospice must provide ongoing training for its employees.
    
    Quality Assurance. A hospice must conduct ongoing and comprehensive self-assessments of
the quality and appropriateness of care it provides and that its contractors provide under
arrangements to hospice patients.
    
    Interdisciplinary Team. A hospice must designate an interdisciplinary team to provide or
supervise hospice care services. The interdisciplinary team develops and updates plans of
care, and establishes policies governing the day-to-day provision of hospice services. The
team must include at least a physician, registered nurse, social worker and spiritual or
other counselor. A registered nurse must be designated to coordinate the plan of care.
    
    Volunteers.Hospice programs are required to recruit and train volunteers to provide
patient care services or administrative services. Volunteer services must be provided in an
amount equal to at least five percent of the total patient care hours provided by all paid
hospice employees and contract staff.
    
    Licensure. Each hospice and all hospice personnel must be licensed, certified or
registered in accordance with applicable federal, state and local laws and regulations.
    
    Central Clinical Records.Hospice programs must maintain clinical records for each
hospice patient that are organized in such a way that they may be easily retrieved. The
clinical records must be complete and accurate and protected against loss, destruction and
unauthorized use.
  13




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Surveys.
 Certificate of Need Laws and Other Restrictions.
  Limits on the Acquisition or Conversion of Non-Profit HealthCare Organizations.
 Overview of Government Payments
    14




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Medicare.
  The Medicare Cap.
 Dollar Amount Cap.
  Medicare Cap Year Ending October 31,
    
    Medicare Cap Amount2005
    
    $
    19,7782006
    
    $
    20,5852007
    
    $
    21,4102008 (estimated)
    
    $
    22,052
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Accrued Medicare Cap Contractual AdjustmentsYear ending December 31,2005
    
    
    2006
    
    
    2007(in thousands)Beginning balance  accrued Medicare cap contractual adjustments
    
    $
    2,915
    
    
    $
    14,883
    
    
    $
    26,679Medicare cap contractual adjustments
    
    
    7,182
    (1)
    
    
    10,621
    (2)
    
    
    5,261
    (3)Medicare cap contractual adjustments  discontinued operations
    
    
    4,786
    (4)
    
    
    5,843
    (4)
    
    
    2,429
    (4)Payments to Medicare fiscal intermediaries
    
    
    
    
    
    
    (1,983
    )
    
    
    (12,687
    )Reclassification to accounts payable
    
    
    
    
    
    
    (2,685
    )(5)
    
    
    Ending balance  accrued Medicare cap contractual adjustments
    
    $
    14,883
    
    
    $
    26,679
    
    
    $
    21,682
 
 (1)
    
    On August 26, 2005, the Centers for Medicare & Medicaid Services (CMS) issued
Change Request Transmittal 663 publishing the final Medicare per beneficiary cap
amount of $19,778 for the 2005 Medicare cap year ended October 31, 2005 and
indicated that the cap amount for the 2004 Medicare cap year ended October 31,
2004 was incorrectly computed. This cap amount was lower than the estimated cap
amount that we used for 2005 due to CMSs error in computing the cap amount for
the 2004 Medicare cap year. As a result, the 2005 accrued Medicare cap
contractual adjustment of $7.2 million includes $1.0 million for the lower 2005
Medicare cap amount and an additional $1.1 million for the 2003 and 2004 Medicare
cap years for the estimated impact of the revised cap amounts.(2)
    
    Includes additional accrual of $3.1 million related to the 2005 Medicare cap year.(3)
    
    Includes additional accrual of $0.9 million related to the 2006 Medicare cap year.(4)
    
    Medicare cap contractual adjustments reclassified to discontinued operations are
related to all programs that we have discontinued and sold during 2006 and 2007.(5)
    
    Amounts were reclassified from accrued Medicare cap contractual adjustments to
accounts payable in December 2006 and were paid in January 2007 to the Medicare
fiscal intermediary.  
    
    the actual number of Medicare beneficiary patient admissions and discharges and the dates
of occurrence of each;
    
    changes in the average length of stay at our hospice programs;
    
    fluctuations in admissions and discharges at our hospice programs;
    
    possible enrollment of beneficiaries in our hospice programs who may have previously
elected Medicare hospice coverage through another hospice program and whose Medicare cap
amount is prorated for the days of service for the previous hospice admission;
    
    possible enrollment of beneficiaries with another hospice program who had been on
previous hospice service with one of our own hospice programs and discharged from our
hospice program and whose Medicare cap amount is prorated between the programs for the days
of service for the subsequent hospice admission;
    
    fiscal intermediary disallowances of certain beneficiaries and changes in calculation
methodology;
    
    uncertainty surrounding length of patient stay in various patient groups, particularly
with respect to non-cancer patients; and
    
    the fact that we are not advised of the Medicare cap amount that will be used by Medicare
to calculate our Medicare cap contractual adjustment until the latter part of the Medicare
cap year, requiring us to use an estimate of that amount throughout the year.
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Inpatient Care Cap.
 Fiscal Intermediary Reviews.
  Medicare Six-Month Eligibility Rule.
  Medicaid.
 Long-Term Care Facility Residents.
 17




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Other Healthcare Regulations
 Fraud and Abuse Laws.
    HIPAA Fraud and Abuse Provisions.
 Civil Monetary Penalties Statute.
 False Claims Act.
 18




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State False Claims Laws.
 The Stark Law and State Physician Self-Referral Laws.
   Corporate Practice of Medicine and Fee-Splitting.
  Regulation Governing the Privacy and Transmission of Healthcare Information
  
    
    standardization of certain electronic patient health, administrative and financial data;
    
    privacy standards protecting the privacy of individually identifiable health
information; and
    
    security standards protecting the confidentiality and integrity of electronically held
individually identifiable health information.
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Additional Federal and State Healthcare Laws.
 Surveys and Certification.
 Employment Laws and Regulations.
  Compliance and Continuous Quality Improvement Programs
 Compliance Program:
 
    
    a compliance officer and committee;
    
    a corporate code of business conduct and ethics and standards of conduct;
    
    employee education and training;
    
    an internal system for reporting concerns on a confidential, anonymous basis;
    
    ongoing internal auditing and monitoring programs; and
    
    a means for enforcing the compliance program policies.
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Continuous Quality Improvement:
 
    
    on-going education of staff and quarterly continuous quality improvement meetings at each
of our hospice programs and at our Support Center;
    
    quarterly comprehensive audits of patient charts performed by each of our hospice
programs; and
    
    at least once a year, a comprehensive audit of patient charts performed on each of our
hospice programs by our clinical compliance staff.
   Competition
   Insurance
  21




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Employees
  Available Information
   
 Item 1A. Risk Factors
  If we fail to comply with the terms of our Corporate Integrity Agreement, we could be subject to
substantial monetary penalties or suspension or termination from participation in the Medicare and
Medicaid programs.
  We are highly dependent on payments from Medicare and Medicaid. If there are changes in the rates
or methods governing these payments for our services, our net patient service revenue and profits
could materially decline.
  22




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We are subject to a Medicare cap amount which is calculated by Medicare. Our net patient service
revenue and profitability could be adversely affected by limitations on Medicare payments.
  We operate in an industry that is subject to extensive federal, state and local regulation, and
changes in law and regulatory interpretations could reduce our net patient service revenue and
profitability.
  
    
    payment for services;
    
    conduct of operations, including fraud and abuse, anti-kickback prohibitions, physician
self-referral prohibitions and false claims;
    
    privacy and security of medical records;
    
    employment practices; and
    
    facility and professional licensure, including certificates of need, surveys,
certification and recertification requirements, and corporate practice of medicine
prohibitions.
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Almost half of our hospice patients reside in nursing homes. Changes in the laws and regulations
regarding payments for hospice services and room and board provided to our hospice patients
residing in nursing homes could reduce our net patient service revenue and profitability.
    If we are unable to maintain relationships with existing patient referral sources or to establish
new referral sources, our growth and profitability could be adversely affected.
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Our growth strategy to develop new hospice programs in new and existing markets may not be
successful, which could adversely impact our growth and profitability.
  
    
    identify markets that meet our selection criteria for new hospice programs;
    
    hire and retain a qualified management team to operate each of our new hospice programs;
    
    manage a large and geographically diverse group of hospice programs;
    
    become Medicare and Medicaid certified in new markets;
    
    generate sufficient hospice admissions in new markets to operate profitably in these new
markets; or
    
    compete effectively with existing programs in new markets.
 Our growth strategy to acquire other hospices may not be successful and the integration of future
acquisitions may be difficult and disruptive to our ongoing business.
  
    
    our ability to identify suitable acquisition candidates;
    
    our ability to negotiate favorable acquisition terms, including purchase price, which may
be adversely affected due to increased competition with other buyers;
    
    the availability of financing on terms favorable to us, or at all;
    
    our ability to integrate effectively the systems and operations of acquired hospices;
    
    our ability to retain key personnel of acquired hospices; and
    
    our ability to obtain required regulatory approvals.
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Our loss of key senior management personnel or our inability to hire and retain skilled employees
at a reasonable cost could adversely affect our business and our ability to increase patient
referrals.
   A nationwide shortage of qualified nurses could adversely affect our profitability and our ability
to grow and continue to provide quality, responsive hospice services to our patients as nursing
wages and benefits increase.
  Medical reviews and audits by governmental and private payors could result in material payment
recoupments and payment denials, which could negatively impact our business.
  If any of our hospice programs fails to comply with the Medicare conditions of participation, that
program could be terminated from the Medicare program, thereby adversely affecting our net patient
service revenue and profitability.
  26




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Many states have certificate of need laws or other regulatory provisions that may adversely impact
our ability to expand into new markets and thereby limit our ability to grow and to increase our
net patient service revenue.
  We may not be able to compete successfully against other hospice providers, and competitive
pressures may limit our ability to maintain or increase our market position and adversely affect
our profitability.
  
    
    community-based hospice providers;
    
    national and regional companies;
    
    hospital-based hospice and palliative care programs;
    
    nursing homes; and
    
    home health agencies.
  If our costs were to increase more rapidly than the fixed payment adjustments we receive for our
hospice services from Medicare and Medicaid, our profitability could be negatively impacted.
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Federal and state legislative and regulatory initiatives relating to patient privacy could require
us to expend substantial sums on acquiring and implementing new information systems.
  Our net patient service revenue and profitability may be constrained by cost containment
initiatives undertaken by insurers and managed care companies.
  A significant reduction in the carrying value of our goodwill could have a material adverse effect
on our profitability.
  Professional and general liability claims and hired and non-owned auto liability claims may have
an adverse effect on us either because our insurance coverage may be inadequate to cover the
losses or because claims against us, regardless of merit or eventual outcome, may adversely affect
our reputation, our ability to obtain patient referrals or our ability to expand our business.
   Because of conditions in the credit markets we may not be able to access our funds that are
currently invested in auction rate securities without incurring a substantial loss on the
disposition of such securities.
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We may need additional capital to fund our operations and finance our growth,
and we may not be able to obtain it on terms acceptable to us, or at all.
  The Credit Agreement contains, and future debt agreements may contain, various covenants that limit our
discretion in the operation of our business.
  
    
    incur more debt;
    
    redeem or repurchase stock, pay dividends or make other distributions;
    
    make certain investments;
    
    create liens;
    
    enter into transactions with affiliates;
    
    make certain acquisitions;
    
    merge or consolidate; and
    
    transfer or sell assets.
  29




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We are dependent on the proper functioning of our information systems to efficiently manage our
business.
  Our inability to effectively integrate, manage and keep secure our information systems could
disrupt our operations.
    Provisions in our charter documents, under Delaware law, and in our stockholder rights plan could
discourage a takeover that stockholders may consider favorable.
  
    
    authorize the issuance by the board of directors of preferred stock without the
requirement of stockholder approval, which could make it more difficult for a third party to
acquire a majority of our outstanding voting stock;
    
    provide for a classified board of directors with staggered, three-year terms;
    
    prohibit cumulative voting in the election of directors;
    
    prohibit our stockholders from acting by written consent;
    
    limit the persons who may call special meetings of stockholders;
    
    prohibit our stockholders from amending our bylaws unless the amendment is approved by
the holders of at least 80% of our shares of common stock; and
    
    establish advance notice requirements for nominations for election to the board of
directors or for proposing matters to be approved by stockholders at stockholder meetings.
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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
   31




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Item 4. Submission of Matters to a Vote of Security Holders
  32




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
 Market for Common Stock.
 High
    
    Low2006First Quarter
    
    $
    20.62
    
    
    $
    16.33Second Quarter
    
    $
    18.91
    
    
    $
    15.65Third Quarter
    
    $
    18.25
    
    
    $
    13.05Fourth Quarter
    
    $
    14.67
    
    
    $
    11.862007First Quarter
    
    $
    14.40
    
    
    $
    11.85Second Quarter
    
    $
    13.96
    
    
    $
    11.81Third Quarter
    
    $
    12.50
    
    
    $
    9.23Fourth Quarter
    
    $
    11.14
    
    
    $
    9.06
 Dividends.
  
    
    any applicable contractual restrictions limiting our ability to pay dividends;
    
    our earnings;
    
    our financial condition;
    
    our ability to fund capital requirements; and
    
    other factors our board of directors deems relevant.
 Recent Sales of Unregistered Securities.
 Repurchases of Common Stock.
   33




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##### Table of Contents



(d)(c)
    
    ApproximateTotal Number of Shares
    
    Dollar Value of(a)
    
    (b)
    
    Purchased as Part
    
    Shares that MayTotal Number
    
    Average
    
    of Publicly
    
    Yet be Purchasedof Shares
    
    Price Paid
    
    Announced Plans or
    
    Under the Plans orPeriod
    
    Purchased
    
    per Share
    
    Programs
    
    ProgramsOctober 1-October 31
    
    
    
    
    
    
    
    $
    36,881,345November 1-November 30
    
    
    
    
    
    
    
    $
    36,881,345December 1-December 31
    
    
    
    
    
    
    
    $
    36,881,345Total
    
    
    
    
    
    
    
    $
    36,881,345
 
 Item 6. Selected Financial Data
  
 34




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##### Table of Contents



Year Ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007(In thousands, except per share amounts)Statements of Operations Data:Net patient service revenue
    
    $
    258,726
    
    
    $
    319,827
    
    
    $
    354,517
    
    
    $
    384,981
    
    
    $
    404,872Operating expenses:Direct hospice care
    
    
    134,514
    
    
    
    170,111
    
    
    
    197,880
    
    
    
    227,186
    
    
    
    240,137General and administrative(1)
    
    
    69,906
    
    
    
    87,963
    
    
    
    104,517
    
    
    
    117,915
    
    
    
    131,742Government settlement
    
    
    
    
    
    
    
    
    
    
    13,000
    
    
    
    
    
    
    
    Provision for uncollectible accounts
    
    
    3,912
    
    
    
    7,604
    
    
    
    4,142
    
    
    
    4,117
    
    
    
    5,493Depreciation and amortization
    
    
    2,363
    
    
    
    3,662
    
    
    
    4,033
    
    
    
    5,121
    
    
    
    5,944Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    211Certificate of need application costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,144Total operating expenses
    
    
    210,695
    
    
    
    269,340
    
    
    
    323,572
    
    
    
    354,339
    
    
    
    386,671Income from operations
    
    
    48,031
    
    
    
    50,487
    
    
    
    30,945
    
    
    
    30,642
    
    
    
    18,201Other income (expense):Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )Interest income
    
    
    390
    
    
    
    359
    
    
    
    1,341
    
    
    
    2,576
    
    
    
    2,509Interest expense
    
    
    (140
    )
    
    
    (118
    )
    
    
    (198
    )
    
    
    (187
    )
    
    
    (208
    )250
    
    
    
    241
    
    
    
    1,143
    
    
    
    2,389
    
    
    
    2,287Income from continuing operations before provision for income taxes
    
    
    48,281
    
    
    
    50,728
    
    
    
    32,088
    
    
    
    33,031
    
    
    
    20,488Provision for income taxes
    
    
    18,764
    
    
    
    19,212
    
    
    
    13,338
    
    
    
    11,659
    
    
    
    6,830Income from continuing operations
    
    
    29,517
    
    
    
    31,516
    
    
    
    18,750
    
    
    
    21,372
    
    
    
    13,658Income (loss) from discontinued operations, net of income taxes(2)
    
    
    1,690
    
    
    
    3,480
    
    
    
    (194
    )
    
    
    (1,643
    )
    
    
    (1,547
    )Net income
    
    $
    31,207
    
    
    $
    34,996
    
    
    $
    18,556
    
    
    $
    19,729
    
    
    $
    12,111Income (loss) per common share:Basic:Continuing operations
    
    $
    0.82
    
    
    $
    0.86
    
    
    $
    0.55
    
    
    $
    0.63
    
    
    $
    0.41Discontinued operations
    
    $
    0.05
    
    
    $
    0.10
    
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.04
    )Net income
    
    $
    0.87
    
    
    $
    0.96
    
    
    $
    0.54
    
    
    $
    0.58
    
    
    $
    0.37Diluted:Continuing operations
    
    $
    0.79
    
    
    $
    0.84
    
    
    $
    0.54
    
    
    $
    0.62
    
    
    $
    0.41Discontinued operations
    
    $
    0.05
    
    
    $
    0.09
    
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.05
    )Net income
    
    $
    0.84
    
    
    $
    0.93
    
    
    $
    0.53
    
    
    $
    0.57
    
    
    $
    0.36Weighted average shares outstanding:Basic
    
    
    35,945
    
    
    
    36,445
    
    
    
    34,384
    
    
    
    34,145
    
    
    
    33,029Diluted
    
    
    37,256
    
    
    
    37,551
    
    
    
    34,935
    
    
    
    34,529
    
    
    
    33,188
 35




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##### Table of Contents



Year Ended December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007(Unaudited)(Dollars in thousands)Operating Data:Number of Medicare-certified hospice programs(3)
    
    
    56
    
    
    
    62
    
    
    
    65
    
    
    
    69
    
    
    
    72Admissions(4)
    
    
    25,423
    
    
    
    29,096
    
    
    
    31,378
    
    
    
    32,398
    
    
    
    32,757Days of care(5)
    
    
    2,059,610
    
    
    
    2,518,417
    
    
    
    2,669,021
    
    
    
    2,810,540
    
    
    
    2,843,400Average daily census(6)
    
    
    5,643
    
    
    
    6,881
    
    
    
    7,312
    
    
    
    7,700
    
    
    
    7,790Cash flows provided by operating activities
    
    $
    27,605
    
    
    $
    47,124
    
    
    $
    58,171
    
    
    $
    34,684
    
    
    $
    16,881Cash flows
provided by (used in) investing activities
    
    $
    (27,255
    )
    
    $
    (41,170
    )
    
    $
    (52,845
    )
    
    $
    (29,244
    )
    
    $
    324Cash flows provided by (used in) financing activities
    
    $
    4,983
    
    
    $
    (19,387
    )
    
    $
    (14,994
    )
    
    $
    (13,051
    )
    
    $
    (12,391
    )
 As of December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007(Dollars in thousands)Balance Sheet Data:Working capital
    
    $
    72,806
    
    
    $
    63,259
    
    
    $
    62,639
    
    
    $
    70,555
    
    
    $
    72,493Total assets
    
    
    180,802
    
    
    
    204,091
    
    
    
    244,967
    
    
    
    269,986
    
    
    
    275,209Total long-term debt, including current portion
    
    
    17
    
    
    
    14
    
    
    
    9
    
    
    
    3
    
    
    
    1Stockholders equity
    
    
    144,725
    
    
    
    162,080
    
    
    
    167,298
    
    
    
    179,596
    
    
    
    182,837
 
 (1)
    
    Includes stock-based compensation of $409, $287, $721, $5,616 and $3,829 for the years ended
December 31, 2003, 2004, 2005, 2006 and 2007, respectively. Also, general and
administrative expenses include expenses for hospice care and support center.(2)
    
    See Note 7 in the consolidated financial statements for a discussion of income (loss) from
discontinued operations, net of income taxes.(3)
    
    Number of Medicare-certified hospice programs at end of each respective year.(4)
    
    Represents the total number of patients admitted into our hospice programs during the period.(5)
    
    Represents the total days of care provided to our patients during the period.(6)
    
    Represents the average number of patients for whom we provided hospice care each day during
the period and is computed by dividing days of care by the number of days during the period. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation
 
 Overview
   36




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##### Table of Contents



Developed Hospices
      Discontinued Operations
  37




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##### Table of Contents



Acquisitions
         38




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##### Table of Contents



Net Patient Service Revenue
     Expenses
   39




---



##### Table of Contents



Year Ended December 31,2005
    
    
    2006
    
    
    2007Direct hospice care expenses:Salaries, benefits and payroll taxes
    
    
    35.7
    %
    
    
    39.3
    %
    
    
    39.6
    %Pharmaceuticals
    
    
    5.5
    
    
    
    5.4
    
    
    
    5.3Medical equipment and supplies
    
    
    5.5
    
    
    
    5.3
    
    
    
    5.3Inpatient costs
    
    
    3.0
    
    
    
    2.5
    
    
    
    2.1Other (including medical director fees, contracted patient care
services, nursing home costs and mileage)
    
    
    6.1
    
    
    
    6.5
    
    
    
    7.0Total
    
    
    55.8
    %
    
    
    59.0
    %
    
    
    59.3
    %General and administrative expenses  hospice care:Salaries, benefits and payroll taxes
    
    
    13.4
    %
    
    
    13.9
    %
    
    
    14.7
    %Leases
    
    
    2.4
    
    
    
    2.7
    
    
    
    3.0Other (including insurance, recruiting, travel, telephone and printing)
    
    
    3.4
    
    
    
    3.7
    
    
    
    4.2Total
    
    
    19.2
    %
    
    
    20.3
    %
    
    
    21.9
    %General and administrative expenses  support center:Salaries, benefits and payroll taxes
    
    
    4.4
    %
    
    
    4.3
    %
    
    
    4.5
    %Stock-based compensation
    
    
    0.2
    
    
    
    1.5
    
    
    
    0.9Leases
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.4Legal and accounting fees
    
    
    1.4
    
    
    
    1.2
    
    
    
    0.9Other (including insurance, recruiting, travel, telephone and printing)
    
    
    3.8
    
    
    
    2.9
    
    
    
    3.9Total
    
    
    10.2
    %
    
    
    10.3
    %
    
    
    10.6
    %
  Year Ended December 31,2005
    
    
    2006
    
    
    2007Direct hospice care expenses:Salaries, benefits and payroll taxes
    
    $
    47.44
    
    
    $
    53.81
    
    
    $
    56.37Pharmaceuticals
    
    
    7.27
    
    
    
    7.38
    
    
    
    7.48Medical equipment and supplies
    
    
    7.31
    
    
    
    7.25
    
    
    
    7.56Inpatient costs
    
    
    4.04
    
    
    
    3.38
    
    
    
    3.06Other (including medical director fees, contracted patient care
services, nursing home costs and mileage)
    
    
    8.08
    
    
    
    9.01
    
    
    
    9.99Total
    
    $
    74.14
    
    
    $
    80.83
    
    
    $
    84.46General and administrative expenses  hospice care:Salaries, benefits and payroll taxes
    
    $
    17.85
    
    
    $
    19.00
    
    
    $
    20.97Leases
    
    
    3.23
    
    
    
    3.68
    
    
    
    4.29Other (including insurance, recruiting, travel, telephone and printing)
    
    
    6.02
    
    
    
    6.65
    
    
    
    7.74Total
    
    $
    27.10
    
    
    $
    29.33
    
    
    $
    33.00
 Stock-Based Compensation Charges
  40




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##### Table of Contents



Provision for Income Taxes
  Critical Accounting Policies
  41




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##### Table of Contents



Net Patient Service Revenue and Allowance for Uncollectible Accounts
   Medicare Regulation
 The Medicare Cap.
 Dollar Amount Cap.
  Accrued Medicare Cap Contractual AdjustmentsYear ending December 31,2005
    
    
    2006
    
    
    2007(in thousands)Beginning balance  accrued Medicare cap contractual adjustments
    
    $
    2,915
    
    
    $
    14,883
    
    
    $
    26,679Medicare cap contractual adjustments
    
    
    7,182
    (1)
    
    
    10,621
    (2)
    
    
    5,261
    (3)Medicare cap contractual adjustments  discontinued operations
    
    
    4,786
    (4)
    
    
    5,843
    (4)
    
    
    2,429
    (4)Payments to Medicare fiscal intermediaries
    
    
    
    
    
    
    (1,983
    )
    
    
    (12,687
    )Reclassification to accounts payable
    
    
    
    
    
    
    (2,685
    )(5)
    
    
    Ending balance  accrued Medicare cap contractual adjustments
    
    $
    14,883
    
    
    $
    26,679
    
    
    $
    21,682
 
 (1)
    
    On August 26, 2005, the Centers for Medicare & Medicaid Services (CMS) issued
Change Request Transmittal 663 publishing the final Medicare per beneficiary cap
amount of $19,778 for the 2005 Medicare cap year ended October 31, 2005 and
indicated that the cap amount for the 2004 Medicare cap year ended October 31,
2004 was incorrectly computed. This cap amount was lower than the estimated cap
amount that we used for 2005 due to CMSs error in computing the cap amount for
the 2004 Medicare cap year. As a result, the 2005 accrued Medicare cap
contractual adjustment of $7.2 million includes $1.0 million for the lower 2005
Medicare cap amount and an additional $1.1 million for the 2003 and 2004 Medicare
cap years for the estimated impact of the revised cap amounts.(2)
    
    Includes additional accrual of $3.1 million related to the 2005 Medicare cap year. 42




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##### Table of Contents



(3)
    
    Includes additional accrual of $0.9 million related to the 2006 Medicare cap year.(4)
    
    Medicare cap contractual adjustments reclassified to discontinued operations are
related to all programs that we have discontinued and sold during 2006 and 2007.(5)
    
    Amounts were reclassified from accrued Medicare cap contractual adjustments to
accounts payable in December 2006 and were paid in January 2007 to the Medicare
fiscal intermediary.  Insurance Risks
  Goodwill
  43




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##### Table of Contents



Results of Operations
  Year Ended December 31,2005
    
    
    2006
    
    
    2007Net patient service revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Operating expenses:Direct hospice care
    
    
    55.8
    
    
    
    59.0
    
    
    
    59.3General and administrative  hospice care
    
    
    19.2
    
    
    
    20.3
    
    
    
    21.9General and administrative  support center
    
    
    10.2
    
    
    
    10.3
    
    
    
    10.6Government settlement
    
    
    3.7
    
    
    
    
    
    
    
    Provision for uncollectible accounts
    
    
    1.2
    
    
    
    1.1
    
    
    
    1.4Depreciation and amortization
    
    
    1.1
    
    
    
    1.4
    
    
    
    1.5Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    Certificate of need application costs
    
    
    
    
    
    
    
    
    
    
    0.891.2
    
    
    
    92.1
    
    
    
    95.5Income from continuing operations before other income (expense)
    
    
    8.8
    
    
    
    7.9
    
    
    
    4.5Other income (expense), net
    
    
    0.3
    
    
    
    0.7
    
    
    
    0.6Income from continuing operations before provision for income taxes
    
    
    9.1
    
    
    
    8.6
    
    
    
    5.1Provision for income taxes
    
    
    3.8
    
    
    
    3.0
    
    
    
    1.7Income from continuing operations
    
    
    5.3
    
    
    
    5.6
    
    
    
    3.4Income (loss) from discontinued operations, net of income taxes
    
    
    (0.1
    )
    
    
    (0.5
    )
    
    
    (0.4
    )Net income
    
    
    5.2
    %
    
    
    5.1
    %
    
    
    3.0
    %
 Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
  Year Ended December 31,2006
    
    
    2007
    
    
    $ Change
    
    
    % Change(In thousands, except % change)Net patient service revenue
    
    $
    384,981
    
    
    $
    404,872
    
    
    $
    19,891
    
    
    
    5.2
    %Operating expenses:Direct hospice care
    
    
    227,186
    
    
    
    240,137
    
    
    
    12,951
    
    
    
    5.7
    %General and administrative  hospice care
    
    
    78,319
    
    
    
    88,580
    
    
    
    10,261
    
    
    
    13.1
    %General and administrative  support center
    
    
    39,596
    
    
    
    43,162
    
    
    
    3,566
    
    
    
    9.0
    %Provision for uncollectible accounts
    
    
    4,117
    
    
    
    5,493
    
    
    
    1,376
    
    
    
    33.4
    %Depreciation and amortization
    
    
    5,121
    
    
    
    5,944
    
    
    
    823
    
    
    
    16.1
    %Impairment of long-lived assets
    
    
    
    
    
    
    211
    
    
    
    211
    
    
    
    100.0
    %Certificate of need application costs
    
    
    
    
    
    
    3,144
    
    
    
    3,144
    
    
    
    100.0
    %354,339
    
    
    
    386,671
    
    
    
    32,332
    
    
    
    9.1
    %Income from continuing operations before other income (expense)
    
    
    30,642
    
    
    
    18,201
    
    
    
    (12,441
    )
    
    
    (40.6
    )%Other income (expense)
    
    
    2,389
    
    
    
    2,287
    
    
    
    (102
    )
    
    
    (4.3
    )%Income from continuing operations before provision for income taxes
    
    
    33,031
    
    
    
    20,488
    
    
    
    (12,543
    )
    
    
    (38.0
    )%Provision for income taxes
    
    
    11,659
    
    
    
    6,830
    
    
    
    (4,829
    )
    
    
    (41.4
    )%Income from continuing operations
    
    
    21,372
    
    
    
    13,658
    
    
    
    (7,714
    )
    
    
    (36.1
    )%Loss from discontinued operations, net of income taxes
    
    
    (1,643
    )
    
    
    (1,547
    )
    
    
    96
    
    
    
    (5.8
    )%Net income
    
    $
    19,729
    
    
    $
    12,111
    
    
    $
    (7,618
    )
    
    
    (38.6
    )%
 Net Patient Service Revenue
  44




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##### Table of Contents



Direct Hospice Care Expenses
  General and Administrative Expenses  Hospice Care
  General and Administrative Expenses  Support Center
  Provision for Uncollectible Accounts
  45




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##### Table of Contents



Depreciation and Amortization Expense
  Impairment of Long-lived Assets
  Certificate of Need Application Costs
  Other Income (Expense)
  Provision for Income Taxes
  46




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##### Table of Contents



Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
  Year Ended December 31,2005
    
    
    2006
    
    
    $ Change
    
    
    % Change(In thousands, except % change)Net patient service revenue
    
    $
    354,517
    
    
    $
    384,981
    
    
    $
    30,464
    
    
    
    8.6
    %Operating expenses:Direct hospice care
    
    
    197,880
    
    
    
    227,186
    
    
    
    29,306
    
    
    
    14.8
    %General and administrative  hospice care
    
    
    68,198
    
    
    
    78,319
    
    
    
    10,121
    
    
    
    14.8
    %General and administrative  support center
    
    
    36,319
    
    
    
    39,596
    
    
    
    3,277
    
    
    
    9.0
    %Government settlement
    
    
    13,000
    
    
    
    
    
    
    
    (13,000
    )
    
    
    100.0
    %Provision for uncollectible accounts
    
    
    4,142
    
    
    
    4,117
    
    
    
    (25
    )
    
    
    (0.6
    )%Depreciation and amortization
    
    
    4,033
    
    
    
    5,121
    
    
    
    1,088
    
    
    
    27.0
    %323,572
    
    
    
    354,339
    
    
    
    30,767
    
    
    
    9.5
    %Income from continuing operations before other income (expense)
    
    
    30,945
    
    
    
    30,642
    
    
    
    (303
    )
    
    
    (1.0
    )%Other income (expense)
    
    
    1,143
    
    
    
    2,389
    
    
    
    1,246
    
    
    
    109.0
    %Income from continuing operations before provision for income taxes
    
    
    32,088
    
    
    
    33,031
    
    
    
    943
    
    
    
    2.9
    %Provision for income taxes
    
    
    13,338
    
    
    
    11,659
    
    
    
    (1,679
    )
    
    
    (12.6
    )%Income from continuing operations
    
    
    18,750
    
    
    
    21,372
    
    
    
    2,622
    
    
    
    14.0
    %Income (loss) from discontinued operations, net of income taxes
    
    
    (194
    )
    
    
    (1,643
    )
    
    
    (1,449
    )
    
    
    746.9
    %Net income
    
    $
    18,556
    
    
    $
    19,729
    
    
    $
    1,173
    
    
    
    6.3
    %
 Net Patient Service Revenue
  Direct Hospice Care Expenses
  47




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##### Table of Contents



General and Administrative Expenses  Hospice Care
  General and Administrative Expenses  Support Center
  Government Settlement
  Provision for Uncollectible Accounts
  Depreciation and Amortization Expense
  Other Income (Expense)
  Provision for Income Taxes
  48




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##### Table of Contents



Liquidity and Capital Resources
        49




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##### Table of Contents



50




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##### Table of Contents



Contractual Obligations
  Payments Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 Years(In thousands)Long-Term Debt
    
    $
    1
    
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    Software License Fees
    
    
    364
    
    
    
    364
    
    
    
    
    
    
    
    
    
    
    
    New Billing System
    
    
    2,283
    
    
    
    2,283
    
    
    
    
    
    
    
    
    
    
    
    Operating Leases
    
    
    52,437
    
    
    
    12,980
    
    
    
    18,661
    
    
    
    12,174
    
    
    
    8,622Total Contractual Obligations
    
    $
    55,085
    
    
    $
    15,628
    
    
    $
    18,661
    
    
    $
    12,174
    
    
    $
    8,622
 Off-Balance Sheet Arrangements
  Interest Rate and Foreign Exchange Risk
 Interest
Rate Risk.
 Foreign Exchange.
 Recent Accounting Pronouncements
    51




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##### Table of Contents



Payment, Legislative and Regulatory Changes
  Inflation
  
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 8. Financial Statements and Supplementary Data
  52




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##### Table of Contents



Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
  Managements Report on Internal Control over Financial Reporting.
   Internal Control Integrated Framework.
  53




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 The Board of Directors and Shareholders of Odyssey HealthCare, Inc.
     .
     54




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##### Table of Contents



Item 9A(T). Controls and Procedures
 .
 
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  Equity-Based Compensation Plans.
 EQUITY COMPENSATION PLAN INFORMATION
 (a)
    
    
    
    
    
    
    (c)Number of Securities
    
    
    
    
    
    
    Number of Securitiesto be Issued
    
    
    (b)
    
    
    Remaining AvailableUpon Exercise of
    
    
    Weighted-Average
    
    
    for Future IssuanceOutstanding Options,
    
    
    Exercise Price of
    
    
    Under Equity CompensationWarrants, Awards
    
    
    Outstanding Options,
    
    
    Plans (Excluding SecuritiesPlan Category
    
    and Rights
    
    
    Warrants, and Rights
    
    
    Reflected in Column(a))(In thousands, except average exercise price)Equity Compensation Plans Approved by Stockholders
    
    
    3,460
    (1)
    
    $
    16.38
    
    
    
    1,467Equity Compensation Plans Not Approved by Stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    3,460
    
    
    $
    16.38
    
    
    
    1,467
 
 (1)
    
    Includes (i) 36,250 unvested restricted stock awards granted to
certain executive officers on November 18, 2004, (ii) 66,000 unvested
restricted stock awards granted to certain employees on October 4,
2005, (iii) 76,538 unvested restricted stock units awarded to certain
executive officers on December 20, 2006 and (iv) 28,000 unvested
restricted stock awards granted to the members of the Board of
Directors on May 4, 2007. Restricted stock awards and restricted stock
units are not included in the calculation of the weighted-average
exercise price since there is no exercise price attached to the award. 55




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
     ExhibitNumber
    
    Description2.1 
    
    Agreement and Plan of Merger, dated January 15, 2008, among Odyssey HealthCare Holding Company, OHC
Investment, Inc. and VistaCare, Inc. (incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K as filed with the Commission on January 15, 2008)2.2 
    
    Form of Stockholder Agreement, dated January 15, 2008, among Odyssey HealthCare Holding Company, OHC
Investment, Inc. and each of the following directors and executive officers of VistaCare, Inc.: Richard R.
Slager, John Crisci, Stephen Lewis, Roseanne Berry, Henry Hirvela, James T. Robinson, James C. Crews, Jon
M. Donnell, Jack A. Henry, Geneva B. Johnson, Pete A. Klisares and Brian S. Tyler (incorporated by
reference to Exhibit 2.2 to the Companys Current Report on Form 8-K as filed with the Commission on
January 15, 2008)3.1 
    
    Fifth Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to
Odyssey HealthCare, Incs (the Company) Amendment No. 2 to Registration Statement on Form S-1
(Registration No. 333-51522) as filed with the Securities and Exchange Commission (the Commission) on
September 13, 2001)3.2 
    
    Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Companys Registration
Statement on Form S-1 (Registration No. 333-51522) as filed with the Commission on December 8, 2000)3.3 
    
    First Amendment to the Second Amended and Restated Bylaws of Odyssey HealthCare, Inc., effective as of
December 20, 2007 (incorporated by reference to Exhibit 3.2 to the Companys Current Report on Form 8-K as
filed with the Commission on December 21, 2007)4.1 
    
    Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Companys Amendment No. 1
to Registration Statement on Form S-1 (Registration No. 333-51522) as filed with the Commission on August
2, 2001)4.2 
    
    Second Amended and Restated Registration Rights Agreement, dated July 1, 1998, by and among Odyssey
HealthCare, Inc. and the security holders named therein (incorporated by reference to Exhibit 4.3 to the
Companys Registration Statement on Form S-1 (Registration No. 333-51522) as filed with the Commission on
December 8, 2000)4.3 
    
    Rights Agreement (the Rights Agreement) dated November 5, 2001, between Odyssey HealthCare, Inc. and
Rights Agent (incorporated by reference to Exhibit 4.1 to the Companys Registration Statement on Form 8-A
as filed with the Commission on December 8, 2001)4.4 
    
    Form of Certificate of Designation of Series A Junior Participating Preferred Stock (included as Exhibit A
to the Rights Agreement (Exhibit 4.3 hereto))10.1.1 
    
    Credit Agreement, dated May 14, 2004, among Odyssey HealthCare Operating A, LP, Odyssey HealthCare
Operating B, LP and Hospice of the Palm Coast, Inc. as borrowers, Odyssey HealthCare Inc. as a credit party
and the other credit parties signatory thereto, General Electric Capital Corporation as agent and lender,
and the other lenders signatory thereto from to time (incorporated by reference to Exhibit 2.1 to the
Companys Current Report on Form 8-K as filed with the Commission on May 26, 2004)
 56




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##### Table of Contents



ExhibitNumber
    
    Description10.1.2 
    
    Consent and Amendment No. 1 to Credit Agreement dated November 1, 2004 among Odyssey HealthCare Operating
A, LP, Odyssey HealthCare Operating B, LP, and Hospice of the Palm Coast, Inc. as borrowers, Odyssey
HealthCare, Inc. as a credit party and the other credit parties signatory thereto, General Electric Capital
Corporation as agent and lender, and the other lenders signatory thereto from time to time (incorporated by
reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q as filed with the Commission on
November 9, 2004)10.1.3 
    
    Waiver and Amendment No. 2 Credit Agreement, dated February 22, 2006, by and among General Electric Capital
Corporation, a Delaware corporation, Odyssey HealthCare Operating A, LP, a Delaware limited partnership,
Odyssey HealthCare Operating B, LP, a Delaware limited partnership, Hospice of the Palm Coast, Inc., a
Florida not for profit corporation, and the other Credit Parties signatory thereto (incorporated by
Reference to Exhibit 10.1 to the companys Current Report on Form 8-K as filed with the Commission on
February 27, 2006)10.1.4 
    
    Consent, Waiver and Amendment No. 3 to Credit Agreement, dated September 29, 2006, by and among General
Electric Capital Corporation, a Delaware corporation, individually as sole Lender and as Agent for the
Lenders, Odyssey HealthCare Operating A, LP, A Delaware limited partnership, Odyssey HealthCare Operating
B, LP, a Delaware limited partnership, Hospice of the Palm Coast, Inc., a Florida not for profit
corporation, and the other Credit Parties signatory thereto (incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K as filed with the Commission on October 4, 2006)10.1.5 
    
    Consent and Amendment No. 4 to Credit Agreement, dated October 19, 2006, by and among General Electric
Capital Corporation, a Delaware corporation, individually as sole Lender and as Agent for the Lenders,
Odyssey HealthCare Operating A, LP, a Delaware limited partnership, Odyssey HealthCare Operating B, LP, a
Delaware limited partnership, Hospice of the Palm Coast, Inc., a Florida not for profit corporation, and
the other Credit Parties signatory thereto (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K as filed with the Commission on October 25, 2006)10.1.6 
    
    Amendment No. 5 to Credit Agreement, dated May 4, 2007, by and among General Electric Capital Corporation,
a Delaware corporation, individually as sole Lender and as Agent for the Lenders, Odyssey HealthCare
Operating A, LP, a Delaware limited partnership, Odyssey HealthCare Operating B, LP, a Delaware limited
partnership, Hospice of the Palm Coast, Inc., a Florida not for profit corporation, and the other Credit
Parties signatory thereto (incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K as filed with the Commission on May 8, 2007)10.1.7 
    
    Amendment No. 6 to Credit Agreement, dated May 14, 2007, by and among General Electric Capital Corporation,
a Delaware corporation, individually as sole Lender and as Agent for the Lenders, Odyssey HealthCare
Operating A, LP, a Delaware limited partnership, Odyssey HealthCare Operating B, LP, a Delaware limited
partnership, Hospice of the Palm Coast, Inc., a Florida not for profit corporation, and the other Credit
Parties signatory thereto (incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K as filed with the Commission on May 18, 2007)10.1.8 
    
    Amended and Restated Credit Agreement, dated May 24, 2007, by and among General Electric Capital
Corporation, a Delaware corporation, individually as Lender and as Agent for the Lenders, the other Lenders
signatory thereto, Odyssey HealthCare Operating A, LP, a Delaware limited partnership, Odyssey HealthCare
Operating B, LP, a Delaware limited partnership, Hospice of the Palm Coast, Inc., a Florida not for profit
corporation, and the other Credit Parties signatory thereto (incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K as filed with the Commission on May 30, 2007)10.1.9 
    
    Second Amended and Restated Credit Agreement, dated February 28, 2008, by and among General Electric
Capital Corporation, a Delaware corporation, individually as Lender and as Agent for the Lenders, the other
Lenders signatory thereto, Odyssey HealthCare Operating A, LP, a Delaware limited partnership, Odyssey
HealthCare Operating B, LP, a Delaware limited partnership, Hospice of the Palm Coast, Inc., a Florida not
for profit corporation, OHC Investment Inc., a Delaware corporation, and the other Credit Parties signatory
thereto (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K as filed
with the Commission on March 4, 2008)10.2 
    
    Employment Agreement, dated as of October 11, 2005, by and between Odyssey HealthCare, Inc. and Robert A.
Lefton (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K as filed with
the Commission on October 12, 2005)10.3 
    
    Employment Agreement, dated as of August 1, 2005, by and between Odyssey HealthCare, Inc. and Brenda A.
Belger (incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q as filed
with the Commission on November 9, 2005)10.4 
    
    Employment Agreement, dated as of August 1, 2005, by and between Odyssey HealthCare, Inc. and W. Bradley
Bickham (incorporated by reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q as filed
with the Commission on November 9, 2005)
 57




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##### Table of Contents



ExhibitNumber
    
    Description10.5 
    
    Employment Agreement, dated as of August 1, 2005, by and between Odyssey HealthCare, Inc. and Deborah A.
Hoffpauir (incorporated by reference to Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q as
filed with the Commission on November 9, 2005)10.6 
    
    Employment Agreement, dated as of August 1, 2005, by and between Odyssey HealthCare, Inc. and Kathleen A.
Ventre (incorporated by reference to Exhibit 10.6 to the Companys Quarterly Report on Form 10-Q as filed
with the Commission on November 9, 2005)10.7.1 
    
    Employment Agreement, dated as of January 16, 2006, by and Between Odyssey HealthCare, Inc. and Woodrin
Grossman (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K as filed
with the Commission on January 20, 2006)10.7.2 
    
    Amendment to Employment Agreement, dated December 21, 2007, between the Company and Woodrin Grossman
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K as filed with the
Commission on December 28, 2007)10.8 
    
    Employment Agreement by and between Odyssey HealthCare, Inc. And R. Dirk Allison, dated October 30, 2006
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K as filed with the
Commission on October 30, 2006)10.9 
    
    Employment Agreement by and between Odyssey HealthCare, Inc. and Craig P. Goguen, dated July 26, 2007
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K as filed with the
Commission on July 30, 2007)10.10 
    
    Agreement by and among Odyssey HealthCare, Inc. and Richard R. Burnham, effective as of January 1, 2007
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K as filed with the
Commission on January 5, 2007)10.11 
    
    Agreement, between the Company and Deborah A. Hoffpauir, dated June 29, 2007 (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K as filed with the Commission on July 5, 2007)10.12 
    
    Equity Award Termination Agreement, Release and Waiver, between the Company and Deborah A. Hoffpauir, dated
June 29, 2007 (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K as
filed with the Commission on July 5, 2007)10.13.1 
    
    Odyssey HealthCare, Inc. Stock Option Plan (the Stock Option Plan) (incorporated by reference to Exhibit
10.5 to the Companys Registration Statement on Form S-1 (Registration No. 333-51522) as filed with the
Commission on December 8, 2000)10.13.2 
    
    First Amendment to the Stock Option Plan, dated January 31, 2001 (incorporated by reference to Exhibit
10.5.2 to the Companys Amendment No. 2 to Registration Statement on Form S-1 (Registration No. 333-51522)
as filed with the Commission on September 13, 2001)10.14.1 
    
    2001 Equity-Based Compensation Plan (incorporated by reference to Exhibit 10.6 to the Companys Amendment
No. 2 to Registration Statement on Form S-1 (Registration No. 333-51522) as filed with the Commission on
September 13, 2001)10.14.2 
    
    First Amendment to the 2001 Equity-Based Compensation Plan, dated May 5, 2005 (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K as filed with the Commission On May 5, 2005)10.14.3 
    
    Second Amendment to the 2001 Equity-Based Compensation Plan, dated May 5, 2005 (incorporated by reference
to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q as filed with the Commission on August 8,
2005)10.14.4 
    
    Form of Restricted Stock Award Agreement pursuant to the 2001 Equity  Based Compensation Plan Management
Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K as filed with the Commission on January 12, 2005)10.14.5 
    
    Odyssey HealthCare, Inc. Equity-Based Compensation Plan Management Stock Option Agreement, dated October
11, 2005, by and between Odyssey HealthCare, Inc. and Robert A. Lefton (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K as filed with the Commission on October 12, 2005)10.14.6 
    
    Form of Restricted Stock Unit Award Agreement under the Odyssey HealthCare Inc. 2001 Equity Based
Compensation Plan  Time Based RSU Award (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K as filed with the Commission on February 26, 2007)10.14.7 
    
    Form Restricted Stock Unit Award Agreement under the Odyssey HealthCare Inc. 2001 Equity Based Compensation
Plan  Additional Incentive Based RSU Award (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K as filed with the Commission on February 26, 2007)10.14.8 
    
    Form of Restricted Stock Award Agreement under the Odyssey HealthCare, Inc. 2001 Equity-Based Compensation
Plan  Non-Employee Director Award (incorporated by reference to Exhibit 10.4 to the Companys Quarterly
Report on Form 10-Q as filed with the Commission on November 9, 2007)
 58




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##### Table of Contents



ExhibitNumber
    
    Description10.15.1 
    
    Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.7 to the Companys Amendment No. 2 to
Registration Statement on Form S-1 (Registration No. 333-51522) as filed with the Commission on September
13, 2001)10.15.2 
    
    First Amendment to Employee Stock Purchase Plan, dated March 6, 2002 *10.16 
    
    Form of Indemnification Agreement between Odyssey HealthCare, Inc. and its directors and officers
(incorporated by reference to Exhibit 10.8 to the Companys Registration Statement on Form S-1
(Registration No. 333-51522) as filed with the Commission on December 8, 2000)10.17.1 
    
    Promissory Note and Warrant Purchase Agreement, dated May 22, 1998, by and among Odyssey HealthCare, Inc.
and the other parties thereto (incorporated by reference to Exhibit 10.10.1 to the Companys Registration
Statement on Form S-1 (Registration No. 333-51522) as filed with the Commission on December 8, 2000)10.17.2
    
    Form of Warrant, dated May 22, 1998 (incorporated by reference to Exhibit 10.10.2 to the Companys
Registration Statement on Form S-1 (Registration No. 333-51522) as filed with the Commission on December 8,
2000)10.17.3
    
    First Amendment to Warrants, dated December 6, 2000 (incorporated by reference to Exhibit 10.10.3 to the
Companys Amendment No. 1 to Registration Statement on Form S-1 (Registration No. 333-51522) as filed with
the Commission on August 2, 2001)10.18 
    
    Separation Agreement and Release, dated January 19, 2005, between David C. Gasmire and Odyssey HealthCare,
Inc. (incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q as filed
with the Commission on May 9, 2005)10.19 
    
    Settlement Agreement, dated July 6, 2006, among the United States of America acting through the entities
named therein, JoAnn Russell and Odyssey HealthCare, Inc. (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K as filed with the Commission on July 12, 2006)10.20 
    
    Corporate Integrity Agreement, dated July 6, 2006, between the Office of Inspector General of the
Department of Health and Human Services and Odyssey HealthCare, Inc. (incorporated by Reference to Exhibit
10.2 to the Companys Current Report on Form 8-K as filed with the Commission on July 12, 2006)21 
    
    Subsidiaries of Odyssey HealthCare, Inc.*23.1 
    
    Consent of Ernst & Young LLP*31.1 
    
    Certification required by Rule 13a-14(a), dated March 12, 2008, by Robert A. Lefton, Chief Executive
Officer*31.2 
    
    Certification required by Rule 13a-14(a), dated March 12, 2008, by R. Dirk Allison, Chief Financial Officer*32 
    
    Certification required by Rule 13a-14(b), dated March 12, 2008, by Robert A. Lefton, Chief Executive
Officer, and R. Dirk Allison, Chief Financial Officer**
 
 
    
    Management contract or compensatory plan or arrangement.*
    
    Filed herewith.**
    
    Furnished herewith. 59




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##### Table of Contents



SIGNATURES
  ODYSSEY HEALTHCARE, INC.By:
    /s/  ROBERT A. LEFTONRobert A. LeftonPresident and Chief Executive Officer   Signature
    
    Title
    
    Date/s/  ROBERT A. LEFTON
    
    President, Chief Executive Officer,
    
    March 12, 2008Robert A. Lefton
    
    and Director/s/  R. DIRK ALLISON
    
    Senior Vice President, Chief Financial
    
    March 12, 2008R. Dirk Allison
    
    Officer, Assistant Secretary andTreasurer (Principal Financial andAccounting Officer)/s/  RICHARD R. BURNHAM
    
    Chairman of the Board
    
    March 12, 2008Richard R. Burnham/s/  JAMES E. BUNCHER
    
    Director
    
    March 12, 2008James E. Buncher/s/  JOHN K. CARLYLE
    
    Director
    
    March 12, 2008John K. Carlyle/s/  DAVID W. CROSS
    
    Director
    
    March 12, 2008David W. Cross/s/  PAUL J. FELDSTEIN
    
    Director
    
    March 12, 2008Paul J. Feldstein/s/  ROBERT A. ORTENZIO
    
    Director
    
    March 12, 2008Robert A. Ortenzio/s/  SHAWN S. SCHABEL
    
    Director
    
    March 12, 2008Shawn S. Schabel/s/  DAVID L. STEFFY
    
    Director
    
    March 12, 2008David L. Steffy
 60




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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageOdyssey HealthCare, Inc.Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2006 and 2007
    
    
    F-3Consolidated Statements of Operations for the years ended December 31, 2005, 2006 and 2007
    
    
    F-4Consolidated Statements of Stockholders Equity for the years ended December 31, 2005, 2006 and 2007
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2006 and 2007
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 The Board of Directors and Shareholders of Odyssey HealthCare, Inc.
   .
 Accounting for Uncertainty in Income Taxes  An Interpretation of FASB
Statement No. 109
     F-2




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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 December 31,2006
    
    
    2007(In thousands, except share and per share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,572
    
    
    $
    12,386Short-term investments
    
    
    62,390
    
    
    
    49,793Accounts receivable from patient services, net of
allowance for uncollectible accounts of $2,501 and
$4,363 at December 31, 2006 and 2007, respectively
    
    
    64,007
    
    
    
    77,433Deferred tax assets
    
    
    
    
    
    
    1,400Income taxes receivable
    
    
    6,134
    
    
    
    1,968Prepaid expenses and other current assets
    
    
    5,720
    
    
    
    5,467Assets of discontinued operations
    
    
    863
    
    
    
    226Total current assets
    
    
    146,686
    
    
    
    148,673Property and equipment, net of accumulated depreciation
    
    
    20,349
    
    
    
    24,308Goodwill
    
    
    98,179
    
    
    
    98,179Intangibles, net of accumulated amortization
    
    
    4,772
    
    
    
    4,049Total assets
    
    $
    269,986
    
    
    $
    275,209LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    7,171
    
    
    $
    6,109Accrued compensation
    
    
    14,089
    
    
    
    16,797Accrued nursing home costs
    
    
    11,584
    
    
    
    14,146Accrued Medicare cap contractual adjustments
    
    
    26,679
    
    
    
    21,682Other accrued expenses
    
    
    16,397
    
    
    
    17,445Deferred tax liability
    
    
    209
    
    
    
    Current maturities of long-term debt
    
    
    2
    
    
    
    1Total current liabilities
    
    
    76,131
    
    
    
    76,180Long-term debt, less current maturities
    
    
    1
    
    
    
    Deferred tax liability
    
    
    13,720
    
    
    
    14,041Other liabilities
    
    
    538
    
    
    
    1,256Commitments and contingencies
    
    
    
    
    
    
    Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    895Stockholders equity:Common stock, $.001 par value:Authorized shares  75,000,000Issued shares  37,870,373 at December 31, 2006 and
38,063,439 at December 31, 2007
    
    
    38
    
    
    
    38Additional paid-in capital
    
    
    108,682
    
    
    
    113,339Retained earnings
    
    
    126,921
    
    
    
    139,414Treasury stock, at cost, 4,230,972 and
5,347,072 shares held at December 31, 2006 and 2007,
respectively
    
    
    (56,045
    )
    
    
    (69,954
    )Total stockholders equity
    
    
    179,596
    
    
    
    182,837Total liabilities and stockholders equity
    
    $
    269,986
    
    
    $
    275,209
  F-3




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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Year Ended December 31,2005
    
    
    2006
    
    
    2007(In thousands, except per share amounts)Net patient service revenue
    
    $
    354,517
    
    
    $
    384,981
    
    
    $
    404,872Operating expenses:Direct hospice care
    
    
    197,880
    
    
    
    227,186
    
    
    
    240,137General and administrative  hospice care
    
    
    68,198
    
    
    
    78,319
    
    
    
    88,580General and administrative  support center (inclusive of
stock-based compensation of $721, $5,616 and $3,829 for the
years ended December 31, 2005, 2006 and 2007, respectively)
    
    
    36,319
    
    
    
    39,596
    
    
    
    43,162Government settlement
    
    
    13,000
    
    
    
    
    
    
    
    Provision for uncollectible accounts
    
    
    4,142
    
    
    
    4,117
    
    
    
    5,493Depreciation
    
    
    3,625
    
    
    
    4,820
    
    
    
    5,700Amortization
    
    
    408
    
    
    
    301
    
    
    
    244Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    211Certificate of need application costs
    
    
    
    
    
    
    
    
    
    
    3,144323,572
    
    
    
    354,339
    
    
    
    386,671Income from continuing operations before other income (expense)
    
    
    30,945
    
    
    
    30,642
    
    
    
    18,201Other income (expense):Interest income
    
    
    1,341
    
    
    
    2,576
    
    
    
    2,509Interest expense
    
    
    (198
    )
    
    
    (187
    )
    
    
    (208
    )Minority interest in income of consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    (14
    )1,143
    
    
    
    2,389
    
    
    
    2,287Income from continuing operations before provision for income taxes
    
    
    32,088
    
    
    
    33,031
    
    
    
    20,488Provision for income taxes
    
    
    13,338
    
    
    
    11,659
    
    
    
    6,830Income from continuing operations
    
    
    18,750
    
    
    
    21,372
    
    
    
    13,658Loss from discontinued operations, net of income taxes
    
    
    (194
    )
    
    
    (1,643
    )
    
    
    (1,547
    )Net income
    
    $
    18,556
    
    
    $
    19,729
    
    
    $
    12,111Income (loss) per common share:Basic:Continuing operations
    
    $
    0.55
    
    
    $
    0.63
    
    
    $
    0.41Discontinued operations
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.04
    )Net income
    
    $
    0.54
    
    
    $
    0.58
    
    
    $
    0.37Diluted:Continuing operations
    
    $
    0.54
    
    
    $
    0.62
    
    
    $
    0.41Discontinued operations
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.05
    )Net income
    
    $
    0.53
    
    
    $
    0.57
    
    
    $
    0.36Weighted average shares outstanding:Basic
    
    
    34,384
    
    
    
    34,145
    
    
    
    33,029Diluted
    
    
    34,935
    
    
    
    34,529
    
    
    
    33,188
  F-4




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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 Additional
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Treasury
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Stock
    
    
    Equity(Amounts in thousands)Balance at January 1, 2005
    
    
    36,751
    
    
    $
    37
    
    
    $
    93,674
    
    
    $
    88,636
    
    
    $
    (20,267
    )
    
    $
    162,080Stock-based compensation
    
    
    164
    
    
    
    
    
    
    
    721
    
    
    
    
    
    
    
    
    
    
    
    721Tax benefit related to stock option exercises
    
    
    
    
    
    
    
    
    
    
    930
    
    
    
    
    
    
    
    
    
    
    
    930Exercise of stock options
    
    
    455
    
    
    
    
    
    
    
    2,810
    
    
    
    
    
    
    
    
    
    
    
    2,810Employee Stock Purchase Plan
    
    
    41
    
    
    
    
    
    
    
    489
    
    
    
    
    
    
    
    
    
    
    
    489Purchase of treasury stock, at cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,288
    )
    
    
    (18,288
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,556
    
    
    
    
    
    
    
    18,556Balance at December 31, 2005
    
    
    37,411
    
    
    $
    37
    
    
    $
    98,624
    
    
    $
    107,192
    
    
    $
    (38,555
    )
    
    $
    167,298Stock-based compensation
    
    
    60
    
    
    
    
    
    
    
    5,616
    
    
    
    
    
    
    
    
    
    
    
    5,616Tax benefit related to stock option exercises
    
    
    
    
    
    
    
    
    
    
    958
    
    
    
    
    
    
    
    
    
    
    
    958Exercise of stock options
    
    
    361
    
    
    
    1
    
    
    
    2,992
    
    
    
    
    
    
    
    
    
    
    
    2,993Employee Stock Purchase Plan
    
    
    38
    
    
    
    
    
    
    
    492
    
    
    
    
    
    
    
    
    
    
    
    492Purchase of treasury stock, at cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,490
    )
    
    
    (17,490
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,729
    
    
    
    
    
    
    
    19,729Balance at December 31, 2006
    
    
    37,870
    
    
    $
    38
    
    
    $
    108,682
    
    
    $
    126,921
    
    
    $
    (56,045
    )
    
    $
    179,596Stock-based compensation
    
    
    9
    
    
    
    
    
    
    
    3,829
    
    
    
    
    
    
    
    
    
    
    
    3,829Tax benefit related to stock option exercises
    
    
    
    
    
    
    
    
    
    
    119
    
    
    
    
    
    
    
    
    
    
    
    119Exercise of stock options
    
    
    161
    
    
    
    
    
    
    
    472
    
    
    
    
    
    
    
    
    
    
    
    472Employee Stock Purchase Plan
    
    
    23
    
    
    
    
    
    
    
    237
    
    
    
    
    
    
    
    
    
    
    
    237Purchase of treasury stock, at cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,909
    )
    
    
    (13,909
    )Cumulative effect of change in accounting
for uncertainties in income taxes (FIN 48)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    382
    
    
    
    
    
    
    
    382Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,111
    
    
    
    
    
    
    
    12,111Balance at December 31, 2007
    
    
    38,063
    
    
    $
    38
    
    
    $
    113,339
    
    
    $
    139,414
    
    
    $
    (69,954
    )
    
    $
    182,837
  F-5




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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2005
    
    
    2006
    
    
    2007(In thousands)Operating Activities:Net income
    
    $
    18,556
    
    
    $
    19,729
    
    
    $
    12,111Adjustments to reconcile net income to net cash provided by operating activities:Loss from discontinued operations, net of taxes
    
    
    194
    
    
    
    1,643
    
    
    
    1,547Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    211Minority interest in income of consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    14Certificate of need application costs
    
    
    
    
    
    
    
    
    
    
    3,144Depreciation and amortization
    
    
    4,033
    
    
    
    5,121
    
    
    
    5,944Amortization of deferred charges and debt discount
    
    
    109
    
    
    
    109
    
    
    
    113Stock-based compensation
    
    
    721
    
    
    
    5,616
    
    
    
    3,829Tax benefit related to stock option exercises
    
    
    930
    
    
    
    (958
    )
    
    
    (119
    )Provision for uncollectible accounts
    
    
    4,142
    
    
    
    4,117
    
    
    
    5,493Changes in operating assets and liabilities, net of acquisitions:Accounts receivable from patient services
    
    
    (4,677
    )
    
    
    (8,214
    )
    
    
    (18,919
    )Other current assets
    
    
    1,278
    
    
    
    (7,485
    )
    
    
    5,055Deferred taxes
    
    
    (1,417
    )
    
    
    8,373
    
    
    
    (1,289
    )Accrued government settlement
    
    
    13,000
    
    
    
    (13,000
    )
    
    
    Accounts payable, accrued nursing home costs, accrued Medicare cap contractual
adjustments and other accrued expenses
    
    
    21,302
    
    
    
    19,633
    
    
    
    (253
    )Net cash provided by operating activities
    
    
    58,171
    
    
    
    34,684
    
    
    
    16,881Investing Activities:Cash paid for acquisitions, procurement of licenses and certificates of need
    
    
    (5,279
    )
    
    
    (787
    )
    
    
    (2,424
    )Cash received from the sale of a hospice program
    
    
    
    
    
    
    59
    
    
    
    698Purchases of short-term investments
    
    
    (79,669
    )
    
    
    (109,469
    )
    
    
    (49,053
    )Sales of short-term investments
    
    
    39,790
    
    
    
    95,365
    
    
    
    61,650Purchases of property and equipment
    
    
    (7,687
    )
    
    
    (14,412
    )
    
    
    (10,547
    )Net cash provided by (used in) investing activities
    
    
    (52,845
    )
    
    
    (29,244
    )
    
    
    324Financing Activities:Proceeds from issuance of common stock
    
    
    3,299
    
    
    
    3,485
    
    
    
    877Cash received from sale of partnership interests
    
    
    
    
    
    
    
    
    
    
    881Tax benefit related to stock option exercises
    
    
    
    
    
    
    958
    
    
    
    119Purchase of treasury stock
    
    
    (18,288
    )
    
    
    (17,490
    )
    
    
    (13,909
    )Payments of debt issue costs
    
    
    
    
    
    
    
    
    
    
    (357
    )Payments on debt
    
    
    (5
    )
    
    
    (4
    )
    
    
    (2
    )Net cash used in financing activities
    
    
    (14,994
    )
    
    
    (13,051
    )
    
    
    (12,391
    )Net decrease in cash and cash equivalents
    
    
    (9,668
    )
    
    
    (7,611
    )
    
    
    4,814Cash and cash equivalents, beginning of period
    
    
    24,851
    
    
    
    15,183
    
    
    
    7,572Cash and cash equivalents, end of period
    
    $
    15,183
    
    
    $
    7,572
    
    
    $
    12,386Supplemental cash flow informationCash interest paid
    
    $
    89
    
    
    $
    79
    
    
    $
    95Income taxes paid
    
    $
    11,248
    
    
    $
    8,521
    
    
    $
    5,389
  F-6




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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Years Ended December 31, 2005, 2006 and 2007
 1. Organization and Summary of Significant Accounting Policies
 Organization
    Principles of Consolidation
  Reclassification
  Cash and Cash Equivalents and Short-Term Investments
    F-7




---



##### Table of Contents



Fair Value of Financial Instruments
  Accounts Receivable
   Goodwill and Other Non-Amortizable Intangible Assets
  Net Patient Service Revenue
  F-8




---



##### Table of Contents



Accrued Medicare Cap Contractual AdjustmentsYear ending December 31,2005
    
    
    2006
    
    
    2007(in thousands)Beginning balance  accrued Medicare cap contractual adjustments
    
    $
    2,915
    
    
    $
    14,883
    
    
    $
    26,679Medicare cap contractual adjustments
    
    
    7,182
    (1)
    
    
    10,621
    (2)
    
    
    5,261
    (3)Medicare cap contractual adjustments  discontinued operations
    
    
    4,786
    (4)
    
    
    5,843
    (4)
    
    
    2,429
    (4)Payments to Medicare fiscal intermediaries
    
    
    
    
    
    
    (1,983
    )
    
    
    (12,687
    )Reclassification to accounts payable
    
    
    
    
    
    
    (2,685
    )(5)
    
    
    Ending balance  accrued Medicare cap contractual adjustments
    
    $
    14,883
    
    
    $
    26,679
    
    
    $
    21,682
 
 (1)
    
    On August 26, 2005, the Centers for Medicare & Medicaid Services (CMS) issued Change Request Transmittal 663
publishing the final Medicare per beneficiary cap amount of $19,778 for the 2005 Medicare cap year ended
October 31, 2005 and indicated that the cap amount for the 2004 Medicare cap year ended October 31, 2004 was
incorrectly computed. This cap amount was lower than the estimated cap amount that the Company used for 2005 due
to CMSs error in computing the cap amount for the 2004 Medicare cap year. As a result, the 2005 accrued
Medicare cap contractual adjustment of $7.2 million includes $1.0 million for the lower 2005 Medicare cap amount
and an additional $1.1 million for the 2003 and 2004 Medicare cap years for the estimated impact of the revised
cap amounts.(2)
    
    Includes additional accrual of $3.1 million related to the 2005 Medicare cap year.(3)
    
    Includes additional accrual of $0.9 million related to the 2006 Medicare cap year.(4)
    
    Medicare cap contractual adjustments reclassified to discontinued operations are related to all programs that we
have discontinued and sold during 2006 and 2007.(5)
    
    Amounts were reclassified from accrued Medicare cap contractual adjustments to accounts payable in December 2006
and were paid in January 2007 to the Medicare fiscal intermediary.   F-9




---



##### Table of Contents



Charity Care
   Direct Hospice Care Expenses
  Property and Equipment and Other Intangible Assets
     Stock-Based Compensation
  F-10




---



##### Table of Contents



Net Income Per Common Share
  Discontinued Operations
  Income Taxes
   General and Professional Liability Insurance
  Nursing Home Costs
  F-11




---



##### Table of Contents



Advertising Costs
  Deferred Rent Liability
  Use of Estimates
  Recent Accounting Pronouncements
   F-12




---



##### Table of Contents



2. Acquisition
    3. Goodwill and Intangible Assets
  SouthNortheast
    
    
    Southeast
    
    
    Central
    
    
    Midwest
    
    
    Texas
    
    
    Mountain
    
    
    West
    
    
    TotalJanuary 1, 2006
    
    $
    3,397
    
    
    $
    12,298
    
    
    $
    17,346
    
    
    $
    3,734
    
    
    $
    21,775
    
    
    $
    31,983
    
    
    $
    7,630
    
    
    $
    98,163Acquisitions
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16December 31, 2006
    
    
    3,397
    
    
    
    12,314
    
    
    
    17,346
    
    
    
    3,734
    
    
    
    21,775
    
    
    
    31,983
    
    
    
    7,630
    
    
    
    98,179Acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 31, 2007
    
    $
    3,397
    
    
    $
    12,314
    
    
    $
    17,346
    
    
    $
    3,734
    
    
    $
    21,775
    
    
    $
    31,983
    
    
    $
    7,630
    
    
    $
    98,179
  F-13




---



##### Table of Contents



4. Repurchase of Common Stock
     F-14




---



##### Table of Contents



5. Stock Options and Restricted Stock Awards
         F-15




---



##### Table of Contents



F-16




---



##### Table of Contents



Year EndedDecember 31,2005Income from continuing operations, as reported
    
    $
    18,750Add: Stock-based employee compensation expense recorded, net of tax
    
    
    421Deduct: Fair value stock-based employee compensation expense, net of tax
    
    
    (8,897
    )Pro forma income from continuing operations
    
    $
    10,274Net income, as reported
    
    $
    18,556Add: Stock-based employee compensation expense recorded, net of tax
    
    
    421Deduct: Fair value stock-based employee compensation expense, net of tax
    
    
    (8,897
    )Pro forma net income
    
    $
    10,080Earnings per share:Basic income per share:Income from continuing operations per share  as reported
    
    $
    0.55Add: Stock-based employee compensation expense recorded, net of tax
    
    
    0.01Deduct: Fair value stock-based employee compensation expense, net of tax
    
    
    (0.26
    )Pro forma income from continuing operations per share
    
    $
    0.30Net income per share  as reported
    
    $
    0.54Add: Stock-based employee compensation expense recorded, net of tax
    
    
    0.01Deduct: Fair value stock-based employee compensation expense, net of tax
    
    
    (0.26
    )Pro forma net income per share
    
    $
    0.29Diluted income per share:Income from continuing operations per share  as reported
    
    $
    0.54Add: Stock-based employee compensation expense recorded, net of tax
    
    
    0.01Deduct: Fair value stock-based employee compensation expense, net of tax
    
    
    (0.25
    )Pro forma income from continuing operations per share
    
    $
    0.30Net income per share  as reported
    
    $
    0.53Add: Stock-based employee compensation expense recorded, net of tax
    
    
    0.01Deduct: Fair value stock-based employee compensation expense, net of tax
    
    
    (0.25
    )Pro forma net income per share
    
    $
    0.29
  2005
    
    2006
    
    2007Risk-free interest rate
    
    
    4.26
    %
    
    
    4.58
    %
    
    
    4.57
    %Expected life
    
    5 years
    
    
    5 years
    
    
    5 yearsExpected volatility
    
    
    0.347
    
    
    
    0.376
    
    
    
    0.496Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
  Weighted-AverageRemainingWeighted-
    
    Contractual
    
    AggregateAverage
    
    Term
    
    IntrinsicOptions
    
    Exercise Price
    
    (in years)
    
    ValueOutstanding at January 1, 2007
    
    
    3,852,720
    
    
    $
    16.79Granted
    
    
    333,800
    
    
    $
    10.63Exercised
    
    
    (182,114
    )
    
    $
    3.51Cancelled
    
    
    (751,402
    )
    
    $
    18.98Outstanding at December 31, 2007
    
    
    3,253,004
    
    
    $
    16.38
    
    
    
    6.80
    
    
    $
    1,367,673Exercisable at December 31, 2007
    
    
    2,262,863
    
    
    $
    17.48
    
    
    
    6.07
    
    
    $
    1,076,347
  F-17




---



##### Table of Contents



Compensation PlanWeighted-AverageGrant-DateShares
    
    FairValueNon-vested at January 1, 2007
    
    
    1,879,327
    
    
    $
    7.46Granted
    
    
    361,800
    
    
    $
    5.72Vested
    
    
    (514,094
    )
    
    $
    7.01Cancelled
    
    
    (530,104
    )
    
    $
    7.26Non-vested at December 31, 2007
    
    
    1,196,929
    
    
    $
    7.21
    6. Net Income Per Common Share
  Year Ended December 31,2005
    
    
    2006
    
    
    2007(In thousands, except per share amounts)Numerator:Numerator for net income per share Income from continuing operations
    
    $
    18,750
    
    
    $
    21,372
    
    
    $
    13,658Income (loss) from discontinued operations
    
    $
    (194
    )
    
    $
    (1,643
    )
    
    $
    (1,547
    )Net income
    
    $
    18,556
    
    
    $
    19,729
    
    
    $
    12,111Denominator:Denominator for basic net income per share  weighted average shares
    
    
    34,384
    
    
    
    34,145
    
    
    
    33,029Effect of dilutive securities:Employee stock options and unvested restricted stock awards
    
    
    522
    
    
    
    382
    
    
    
    157Series B Preferred Stock Warrants convertible to common stock
    
    
    29
    
    
    
    2
    
    
    
    2Denominator for diluted net income per share  adjusted weighted
average shares and assumed or actual conversions
    
    
    34,935
    
    
    
    34,529
    
    
    
    33,188Income (loss) per common share:Basic:Continuing operations
    
    $
    0.55
    
    
    $
    0.63
    
    
    $
    0.41Discontinued operations
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.04
    )Net income
    
    $
    0.54
    
    
    $
    0.58
    
    
    $
    0.37Diluted:Continuing operations
    
    $
    0.54
    
    
    $
    0.62
    
    
    $
    0.41Discontinued operations
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.05
    )Net income
    
    $
    0.53
    
    
    $
    0.57
    
    
    $
    0.36
 F-18




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##### Table of Contents



7. Discontinued Operations
       As of
    
    
    As ofDecember 31,
    
    
    December 31,2006
    
    
    2007(In thousands)
    
    
    (In thousands)Prepaid expenses and other current assets
    
    $
    105
    
    
    $
    32Property and equipment, net of accumulated depreciation
    
    
    532
    
    
    
    154Medicare licenses
    
    
    226
    
    
    
    40Total assets of discontinued operations
    
    $
    863
    
    
    $
    226
 F-19




---



##### Table of Contents



Year Ended December 31,2005
    
    
    2006
    
    
    2007(In thousands, except per share amounts)Net patient service revenue
    
    $
    27,131
    
    
    $
    25,359
    
    
    $
    16,126Pre-tax loss from operations
    
    $
    (334
    )
    
    $
    (2,231
    )
    
    $
    (2,447
    )Benefit for income taxes
    
    
    140
    
    
    
    752
    
    
    
    816Loss from discontinued operations
    
    $
    (194
    )
    
    $
    (1,479
    )
    
    $
    (1,631
    )Write-down of certain assets to be sold, net of income taxes
    
    
    
    
    
    
    (164
    )
    
    
    84Loss from discontinued operations, net of income taxes
    
    $
    (194
    )
    
    $
    (1,643
    )
    
    $
    (1,547
    )
 8. Allowance for Uncollectible Accounts
  Balance at
    
    Provision for
    
    Write-Offs,
    
    Balance atBeginning of
    
    Uncollectible
    
    Net of
    
    End ofYear
    
    Accounts
    
    Recoveries
    
    Year(In thousands)Year ended December 31, 2005
    
    $
    3,862
    
    
    $
    4,142
    
    
    $
    (5,975
    )
    
    $
    2,029Year ended December 31, 2006
    
    $
    2,029
    
    
    $
    4,117
    
    
    $
    (3,645
    )
    
    $
    2,501Year ended December 31, 2007
    
    $
    2,501
    
    
    $
    5,493
    
    
    $
    (3,631
    )
    
    $
    4,363
 9. Property and Equipment
  December 31,2006
    
    
    2007(In thousands)Office furniture
    
    $
    5,690
    
    
    $
    7,203Computer hardware
    
    
    5,360
    
    
    
    6,160Computer software
    
    
    10,429
    
    
    
    11,384Equipment
    
    
    1,510
    
    
    
    2,225Motor vehicles
    
    
    409
    
    
    
    409Land
    
    
    1,516
    
    
    
    1,521Buildings
    
    
    1,345
    
    
    
    7,206Leasehold improvements
    
    
    7,872
    
    
    
    9,390Construction in progress
    
    
    2,067
    
    
    
    36,198
    
    
    
    45,498Less accumulated depreciation and amortization
    
    
    15,849
    
    
    
    21,190$
    20,349
    
    
    $
    24,308
  F-20




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##### Table of Contents



10. Other Accrued Expenses
  December 31,2006
    
    
    2007(In thousands)Workers compensation
    
    $
    2,846
    
    
    $
    2,182Inpatient
    
    
    3,956
    
    
    
    5,020Rent
    
    
    1,667
    
    
    
    1,649Pharmacy
    
    
    1,052
    
    
    
    333Medical supplies and durable medical equipment
    
    
    1,582
    
    
    
    1,677Property taxes
    
    
    345
    
    
    
    340Medical director fees
    
    
    234
    
    
    
    487Professional fees
    
    
    1,135
    
    
    
    962New billing system and computer software
    
    
    3,006
    
    
    
    2,646Other
    
    
    574
    
    
    
    2,149$
    16,397
    
    
    $
    17,445
 11. Line of Credit and Long-Term Debt
  December 31,2006
    
    
    2007(In thousands)Leasehold improvement loans due between 2005 and 2008; interest at 6.50% and 10.37%
    
    $
    3
    
    
    $
    1Less current maturities
    
    
    2
    
    
    
    1$
    1
    
    
    $
    
     F-21




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##### Table of Contents



12. Income Taxes
  December 31,2006
    
    
    2007(In thousands)Deferred tax assets:Accounts receivable
    
    $
    (1,902
    )
    
    $
    (661
    )Insurance
    
    
    (434
    )
    
    
    (306
    )Accrued compensation
    
    
    1,018
    
    
    
    1,188Workers compensation
    
    
    1,089
    
    
    
    1,082Other
    
    
    229
    
    
    
    97
    
    
    
    1,400Deferred tax liabilities:Deferred compensation
    
    
    1,805
    
    
    
    2,951Government settlement
    
    
    (1,530
    )
    
    
    Amortizable and depreciable assets
    
    
    (14,123
    )
    
    
    (17,425
    )Other
    
    
    (81
    )
    
    
    433(13,929
    )
    
    
    (14,041
    )Net deferred tax liabilities
    
    $
    (13,929
    )
    
    $
    (12,641
    )
 F-22




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##### Table of Contents



Year Ended December 31,2005
    
    
    2006
    
    
    2007(In thousands)Current:Federal
    
    $
    13,159
    
    
    $
    5,683
    
    
    $
    5,245State
    
    
    1,596
    
    
    
    636
    
    
    
    1,06714,755
    
    
    
    6,319
    
    
    
    6,312Deferred:Federal
    
    
    (1,238
    )
    
    
    4,748
    
    
    
    466State
    
    
    (179
    )
    
    
    592
    
    
    
    52(1,417
    )
    
    
    5,340
    
    
    
    518$
    13,338
    
    
    $
    11,659
    
    
    $
    6,830
  Year Ended December 31,2005
    
    
    2006
    
    
    2007Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Tax at federal statutory rate
    
    $
    11,231
    
    
    
    35
    %
    
    $
    11,561
    
    
    
    35
    %
    
    $
    7,171
    
    
    
    35
    %State income tax, net of federal benefit
    
    
    1,284
    
    
    
    4
    
    
    
    661
    
    
    
    2
    
    
    
    727
    
    
    
    4Non-deductible portion of government settlement
    
    
    1,400
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Municipal interest income not included in taxable income
    
    
    (381
    )
    
    
    (1
    )
    
    
    (777
    )
    
    
    (2
    )
    
    
    (739
    )
    
    
    (4
    )Income tax credits
    
    
    
    
    
    
    
    
    
    
    (130
    )
    
    
    (1
    )
    
    
    (313
    )
    
    
    (2
    )Other non-deductible expenses and other
    
    
    (196
    )
    
    
    
    
    
    
    344
    
    
    
    1
    
    
    
    (16
    )
    
    
    $
    13,338
    
    
    
    42
    %
    
    $
    11,659
    
    
    
    35
    %
    
    $
    6,830
    
    
    
    33
    %
   Balance January 1, 2007
    
    $
    1.3Accrual of interest
    
    
    0.2Settlement payment
    
    
    (0.1
    )Reduction for lapse of statutes of limitations
    
    
    (0.1
    )Balance December 31, 2007
    
    $
    1.3
  13. Retirement Plan
  F-23




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##### Table of Contents



14. Commitments and Contingencies
 Leases
   2008
    
    $
    12,9802009
    
    
    10,1872010
    
    
    8,4742011
    
    
    7,0702012
    
    
    5,104Thereafter
    
    
    8,622$
    52,437
 Contingencies and Government Settlement
    F-24




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##### Table of Contents



qui tam qui tam qui tam qui tam qui tam
   15. Segment Reporting
  F-25




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##### Table of Contents



Year Ended December 31,2005
    
    
    2006
    
    
    2007(In thousands)Net patient service revenue:Northeast
    
    $
    28,796
    
    
    $
    36,935
    
    
    $
    46,446Southeast
    
    
    55,193
    
    
    
    63,625
    
    
    
    68,005South Central
    
    
    39,585
    
    
    
    42,476
    
    
    
    44,121Midwest
    
    
    44,876
    
    
    
    51,618
    
    
    
    51,433Texas
    
    
    51,155
    
    
    
    59,786
    
    
    
    63,074Mountain
    
    
    77,413
    
    
    
    74,529
    
    
    
    71,835West
    
    
    58,774
    
    
    
    60,587
    
    
    
    60,819Corporate
    
    
    (1,275
    )
    
    
    (4,575
    )
    
    
    (861
    )$
    354,517
    
    
    $
    384,981
    
    
    $
    404,872Direct hospice care expenses:Northeast
    
    $
    16,749
    
    
    $
    21,394
    
    
    $
    25,714Southeast
    
    
    30,662
    
    
    
    39,072
    
    
    
    43,445South Central
    
    
    23,553
    
    
    
    26,514
    
    
    
    29,418Midwest
    
    
    22,931
    
    
    
    27,692
    
    
    
    29,585Texas
    
    
    30,486
    
    
    
    37,259
    
    
    
    40,080Mountain
    
    
    42,742
    
    
    
    41,441
    
    
    
    40,311West
    
    
    30,757
    
    
    
    33,814
    
    
    
    31,712Corporate
    
    
    
    
    
    
    
    
    
    
    (128
    )$
    197,880
    
    
    $
    227,186
    
    
    $
    240,137Income (loss) from continuing operations before other income (expense):Northeast
    
    $
    3,920
    
    
    $
    5,833
    
    
    $
    9,935Southeast
    
    
    13,083
    
    
    
    10,842
    
    
    
    8,680South Central
    
    
    6,257
    
    
    
    5,573
    
    
    
    2,696Midwest
    
    
    12,346
    
    
    
    13,969
    
    
    
    9,938Texas
    
    
    9,973
    
    
    
    9,022
    
    
    
    6,943Mountain
    
    
    20,602
    
    
    
    18,514
    
    
    
    15,784West
    
    
    17,188
    
    
    
    13,620
    
    
    
    14,563Corporate
    
    
    (52,424
    )
    
    
    (46,731
    )
    
    
    (50,338
    )$
    30,945
    
    
    $
    30,642
    
    
    $
    18,201
 Year Ended December 31,2005
    
    
    2006
    
    
    2007Average Daily Census:Northeast
    
    
    595
    
    
    
    744
    
    
    
    926Southeast
    
    
    1,231
    
    
    
    1,411
    
    
    
    1,418South Central
    
    
    882
    
    
    
    917
    
    
    
    897Midwest
    
    
    941
    
    
    
    1,009
    
    
    
    1,011Texas
    
    
    1,101
    
    
    
    1,199
    
    
    
    1,236Mountain
    
    
    1,529
    
    
    
    1,396
    
    
    
    1,309West
    
    
    1,033
    
    
    
    1,024
    
    
    
    9937,312
    
    
    
    7,700
    
    
    
    7,790
 Year Ended December 31,2006
    
    
    2007(In thousands)Total Assets:Northeast
    
    $
    9,321
    
    
    $
    13,597Southeast
    
    
    24,284
    
    
    
    27,110South Central
    
    
    29,453
    
    
    
    33,079Midwest
    
    
    14,003
    
    
    
    18,469Texas
    
    
    37,492
    
    
    
    39,527Mountain
    
    
    45,990
    
    
    
    46,491West
    
    
    19,357
    
    
    
    21,236Corporate
    
    
    90,086
    
    
    
    75,700$
    269,986
    
    
    $
    275,209
 F-26




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##### Table of Contents



16. Unaudited Quarterly Financial Information
  2007 Calendar QuartersFirst
    
    Second
    
    Third
    
    Fourth(In thousands, except per share amounts)Total net revenues
    
    $
    98,158
    
    
    $
    101,157
    
    
    $
    101,808
    
    
    $
    103,749Net income
    
    $
    3,655
    
    
    $
    4,178
    
    
    $
    3,061
    
    
    $
    1,217
    (a)Net income per share  Basic
    
    $
    0.11
    
    
    $
    0.13
    
    
    $
    0.09
    
    
    $
    0.04Net income per share  Diluted
    
    $
    0.11
    
    
    $
    0.12
    
    
    $
    0.09
    
    
    $
    0.04Weighted average shares outstanding  Basic
    
    
    33,540
    
    
    
    33,276
    
    
    
    32,732
    
    
    
    32,584Weighted average shares outstanding  Diluted
    
    
    33,736
    
    
    
    33,466
    
    
    
    32,891
    
    
    
    32,733
 2006 Calendar QuartersFirst
    
    Second
    
    Third
    
    Fourth(In thousands, except per share amounts)Total net revenues
    
    $
    96,269
    
    
    $
    98,068
    
    
    $
    96,955
    
    
    $
    93,689
    (b)Net income (loss)
    
    $
    5,837
    
    
    $
    6,493
    
    
    $
    5,613
    
    
    $
    1,786Net income (loss) per share  Basic
    
    $
    0.17
    
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.05Net income (loss) per share  Diluted
    
    $
    0.17
    
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.05Weighted average shares outstanding  Basic
    
    
    34,299
    
    
    
    34,202
    
    
    
    34,120
    
    
    
    33,964Weighted average shares outstanding  Diluted
    
    
    34,844
    
    
    
    34,676
    
    
    
    34,589
    
    
    
    34,273
 
 (a)
    
    Net income for the fourth quarter 2007 was reduced as a result of a
$2.3 million write-off of capitalized certificate of need application
costs.(b)
    
    Net revenue for the fourth quarter 2006 was reduced as a result of a
$3.1 million additional accrual for Medicare cap contractual
adjustments. F-27